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Canadian income gap may be more real than data suggests: Bank report

Income inequality in Canada hasn&rsquo;t changed in two decades and is lower than in the U.S., TD Bank report says, a finding that surprised the authors.

By Dana FlavelleBusiness Reporter

Tues., Dec. 11, 2012

The gap between rich and poor in Canada hasn’t changed in more than two decades, a new report says. Those findings surprised even its authors, a group of economists at TD Bank, given the growing public outcry over income inequality.

“We were very surprised to discover that according to the benchmark used for measuring income inequality there hasn’t been an increase since 1998,” TD chief economist Craig Alexander said in an interview Tuesday.

“So, the natural question is, if we have all these increasing concerns about income inequality, why isn’t the traditional benchmark showing it?”

The report, Income and Income Inequality: A Tale of Two Countries, found income inequality is worse in the U.S. than in Canada and has been rising faster since 1998.

Indeed, after lagging behind the U.S. for years, median household incomes in Canada were 10 per cent higher than in the U.S. — at $55,000 a year — by 2011, the report found. (Median means half of households earned more and half earned less. It’s a more accurate measure than average because it eliminates the extreme highs and lows.)

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For most of the past two decades, there has been a sizeable gap in median incomes between Canadian and U.S. families. At its peak in 1998, U.S. income was 10 per cent higher than in Canada.

Since then, U.S. incomes have suffered in the wake of two recessions, including the “devastating impact” of the 2008 financial crisis, and have declined fairly steadily to a 16-year low in 2011.

Meanwhile, the solid pace of household income growth here since 1997 had created that Canadian income advantage by 2010.

Despite the report’s findings that income inequality in Canada has remained unchanged since 1998, Alexander said the gap still exists and is a problem.

“I’m not saying we don’t have income inequality in Canada and that inequality isn’t a problem. What I’m saying is income inequality surprisingly — it was an absolutely stunner to me that in actual fact — since 1998 hasn’t risen,” he said in an interview.

The real problem, he suggests, is the very low incomes of the lowest fifth of Canadian households.

Even though their incomes rose 20 per cent over the period, they gained a meager $2,500 a year, for a total income of $15,200 per household, Alexander noted.

They benefitted from rising minimum wage rates and a rebound in government transfer programs over the period.

Meanwhile, the highest fifth of Canadian households saw their median income rise 18 per cent, or $26,700, to $171,900 a year, he said, as public sector employment rose.

Middle class families didn’t fare as well, gaining just 14 per cent, for a median household income of $55,000 a year, he said, as good-paying manufacturing jobs disappeared.

As well, the highest 1 per cent of Canadian households now account for 14 per cent of all income, up from 11 per cent in the 1980s, he said, so a gap at the highest level is widening.

Part of the problem is the way income inequality is measured. It doesn’t take into account wealth, for example.

“When you think of perceptions of income inequality, what do you think about? The mansions, the sports cars and jewelry. What you’re seeing is the difference in wealth, not income,” Alexander said.

Canada’s most populous province, Ontario, gained the least over the period under study.

The study’s findings have important policy implications, Alexander noted.

For example, one reason household debt loads may be so high is that middle class incomes have failed to keep up with economic growth, causing more families to borrow to finance purchases.

As well, lower-income Canadians need more help overcoming barriers to economic success, he said, noting early childhood education would help.

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